Emerge Energy Services (EMES) 10-Q 2017 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to

Commission File No.  001-35912

EMERGE ENERGY SERVICES LP

(Exact name of registrant as specified in its charter)

Delaware	90-0832937
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6000 Western Place, Suite 465, Fort Worth, Texas 76107	(817) 618-4020
(Address of principal executive offices)	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange On Which Registered
Common Units Representing Limited Partner Interests	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)

Large-Accelerated Filer  o	Accelerated Filer  x
Non-Accelerated Filer  o	Smaller Reporting Company  o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  Yes    o  No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    ý  No

As of April 28, 2017, 30,071,969 common units were outstanding.

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TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION
	Forward-Looking Statements	3
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	4
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016	5
	Unaudited Condensed Consolidated Statement of Preferred Units and Partners’ Equity for the Three Months Ended March 31, 2017	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 4.	Mine Safety Disclosures	32
Item 6.	Exhibits	33

2

FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements.”  The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature.  These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us.  While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.  All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions.  Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections.  Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

• failure to secure or maintain contracts with our largest customers, or non-performance of any of those customers under the applicable contract;

• competitive conditions in our industry;

• the amount of frac sand we are able to excavate and process, which could be adversely affected by, among other things, operating difficulties and unusual or unfavorable geologic conditions;

• the volume of frac sand we are able to sell;

• the price at which we are able to sell frac sand;

• changes in the long-term supply of and demand for oil and natural gas;

• volatility of fuel prices;

• unanticipated ground, grade or water conditions at our sand mines;

• actions taken by our customers, competitors and third-party operators;

• our ability to complete growth projects on time and on budget;

• our ability to realize the expected benefits from recent acquisitions;

• increasing costs and minimum contractual obligations relating to our transportation services and infrastructure;

• inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;

• environmental hazards;

• industrial accidents;

• changes in laws and regulations (or the interpretation thereof) related to the mining and hydraulic fracturing industries, silica dust exposure or the environment;

• inability to acquire or maintain necessary permits or mining or water rights;

• facility shutdowns in response to environmental regulatory actions;

• inability to obtain necessary production equipment or replacement parts;

• reduction in the amount of water available for processing;

• technical difficulties or failures;

• labor disputes and disputes with our excavation contractor;

• late delivery of supplies;

• difficulty collecting receivables;

• inability of our customers to take delivery of our products;

• changes in the price and availability of transportation;

• fires, explosions or other accidents;

• pit wall failures or rock falls;

• the effects of future litigation; and

• other factors discussed in this Quarterly Report on Form 10-Q and the detailed factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

When considering forward-looking statements, you should keep in mind the known material risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 in “Risk Factors” and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”  Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

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PART IFINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

EMERGE ENERGY SERVICES LP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands, except unit data)

	March 31, 2017		December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	2,099	$	4
Trade and other receivables, net	40,712		25,103
Inventories	13,253		17,457
Prepaid expenses and other current assets	12,159		11,374
Total current assets	68,223		53,938
Property, plant and equipment, net	163,295		165,484
Intangible assets, net	4,002		4,781
Other assets, net	25,119		25,330
Non-current assets held for sale	473		371
Total assets	$	261,112	$	249,904
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Accounts payable	$	11,846	$	11,221
Accrued liabilities	13,893		11,629
Total current liabilities	25,739		22,850
Long-term debt, net of current portion	152,684		134,012
Business acquisition obligation, net of current portion	6,449		8,063
Other long-term liabilities	32,685		30,323
Total liabilities	217,557		195,248
Commitments and contingencies
Preferred units - Series A - Par value of $1,000 0 units and 10,000 units issued and outstanding as of March 31, 2017 and December 31, 2016, respectively	—		6,914
Partners’ equity:
General partner	—		—
Limited partner common units - 30,071,969 units and 29,076,456 units issued and outstanding as of March 31, 2017 and December 31, 2016, respectively	43,555		47,742
Total partners’ equity	43,555		47,742
Total liabilities and partners’ equity	$	261,112	$	249,904

See accompanying notes to unaudited condensed consolidated financial statements.

4

EMERGE ENERGY SERVICES LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in thousands, except unit and per unit data)

	Three Months Ended March 31,
	2017			2016
Revenues	$	75,344		$	29,670
Operating expenses:
Cost of goods sold (excluding depreciation, depletion and amortization)	72,311			43,790
Depreciation, depletion and amortization	4,656			4,907
Selling, general and administrative expenses	5,878			6,775
Contract and project terminations	—			4,026
Total operating expenses	82,845			59,498
Operating income (loss)	(7,501		)	(29,828		)
Other expense (income):
Interest expense, net	3,198			4,594
Other	691			(1		)
Total other expense	3,889			4,593
Income (loss) from continuing operations before provision for income taxes	(11,390		)	(34,421		)
Provision (benefit) for income taxes	—			20
Net income (loss) from continuing operations	(11,390		)	(34,441		)
Income (loss) from discontinued operations, net of taxes	—			226
Net income (loss)	$	(11,390	)	$	(34,215	)
Basic and diluted earnings (loss) per unit (1):
Earnings (loss) per common unit from continuing operations	$	(0.38	)	$	(1.42	)
Earnings (loss) per common unit from discontinued operations	—			0.01
Basic and diluted earnings (loss) per common unit	$	(0.38	)	$	(1.41	)
Weighted average number of common units outstanding - basic and diluted (1)	30,061,022			24,121,222
(1) See Note 8.

See accompanying notes to unaudited condensed consolidated financial statements.

5

EMERGE ENERGY SERVICES LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF PREFERRED UNITS AND PARTNERS’ EQUITY

($ in thousands)

	Limited Partner Common Units			General Partner (non-economic  interest)	Total Partners’ Equity			Preferred Units
Balance at December 31, 2016	$	47,742		—	$	47,742		$	6,914
Net loss	(11,390		)	—	(11,390		)	—
Equity-based compensation	347			—	347			—
Conversion of preferred units	6,914			—	6,914			(6,914		)
Other	(58		)	—	(58		)	—
Balance at March 31, 2017	$	43,555		—	$	43,555		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

6

EMERGE ENERGY SERVICES LP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands) 

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	(11,390	)	$	(34,215	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation, depletion and amortization	4,656			7,261
Equity-based compensation expense	347			340
Project and contract termination costs - non-cash portion	—			4,001
Unrealized loss on fair value of warrant	696			—
Provision for doubtful accounts	—			1,708
Loss (gain) on disposal of assets	(6		)	—
Amortization of debt discount/premium and deferred financing costs	663			465
Write-down of inventory	—			5,394
Unrealized loss on derivative instruments	(149		)	84
Other non-cash	29			29
Changes in operating assets and liabilities:
Accounts receivable	(15,609		)	14,513
Inventories	4,204			8,343
Prepaid expenses and other current assets	(784		)	114
Accounts payable and accrued liabilities	4,194			(11,016		)
Other assets	210			688
Cash flows from operating activities:	(12,939		)	(2,291		)
Cash flows from investing activities:
Purchases of property, plant and equipment	(1,399		)	(4,916		)
Net proceeds from disposal of assets	7			—
Collection of notes receivable	—			3
Cash flows from investing activities:	(1,392		)	(4,913		)
Cash flows from financing activities:
Proceeds from line of credit borrowings	76,100			5,698
Repayment of line of credit borrowings	(57,929		)	(6,500		)
Payment of business acquisition obligation	(1,519		)	(447		)
Payment of financing costs	(163		)	(1,053		)
Other financing activities	(63		)	(3		)
Cash flows from financing activities:	16,426			(2,305		)
Cash and cash equivalents:
Net increase (decrease)	2,095			(9,509		)
Balance at beginning of period	4			20,870
Balance at end of period	$	2,099		$	11,361

See accompanying notes to unaudited condensed consolidated financial statements.

7

EMERGE ENERGY SERVICES LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.ORGANIZATION AND BASIS OF PRESENTATION

Organization

Emerge Energy Services LP (“Emerge”) is a Delaware limited partnership that completed its initial public offering (“IPO”) on May 14, 2013 to become a publicly traded partnership.  The combined entities of Superior Silica Sands LLC (“SSS”), a Texas limited liability company and Emerge Energy Services Operating LLC (“Emerge Operating”), a Delaware limited liability company, represent Emerge. 

References to the “Partnership,” “we,” “our” or “us” refer collectively to Emerge and all of its subsidiaries.

We are a growth-oriented energy services company engaged in the business of mining, producing, and distributing silica sand that is a key input for the hydraulic fracturing of oil and gas wells. The Sand business conducts mining and processing operations from facilities located in Wisconsin and Texas.  In addition to mining and processing silica sand for the oil and gas industry, the Sand business sells its product for use in building products and foundry operations. 

The Fuel business operated transmix processing facilities located in the Dallas-Fort Worth area and in Birmingham, Alabama.  The Fuel business also offered third-party bulk motor fuel storage and terminal services, biodiesel refining, sale and distribution of wholesale motor fuels, reclamation services (which consists primarily of cleaning bulk storage tanks used by other petroleum terminal and others) and blending of renewable fuels. 

On August 31, 2016, we completed the sale of our Fuel business pursuant to an Amended and Restated Purchase and Sale Agreement, dated August 31, 2016 (the “Restated Purchase Agreement”), with Susser Petroleum Operating Company LLC and Sunoco LP (together, “Sunoco”). Sunoco paid Emerge a purchase price of $167.7 million in cash (subject to certain working capital and other adjustments in accordance with the terms of the Restated Purchase Agreement), of which $14.25 million was placed into several escrow accounts to satisfy potential claims from Sunoco for indemnification under the Restated Purchase Agreement. Any escrowed funds remaining after certain periods of time set forth in the Restated Purchase Agreement will be released to Emerge, provided that no unsatisfied indemnity claims exist at such time.

The results of operations of the Fuel business have been classified as discontinued operations for all periods presented. We now operate our continuing business in a single sand segment. We report silica sand operations as our continuing operations and fuel operations as our discontinued operations. 

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our 2016 Annual Report on Form 10-K. These financial statements include the accounts of all of our subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications do not impact net income and do not reflect a material change in the information previously presented in our Condensed Consolidated Statements of Operations.

2. DISCONTINUED OPERATIONS

At March 31, 2016, the assets and liabilities of our Fuel business were classified as held for sale and the results of operations have been classified as discontinued operations for all periods presented in accordance with ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity."

The following corporate costs were allocated to discontinued operations for all periods presented:

• Interest on the revolver was allocated to the discontinued operations based on the allocation of debt between Sand and Fuel business.

• Equity-based compensation costs recognized for the Fuel business employees were allocated to discontinued operations.

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• The taxes paid on behalf of the Fuel business were compiled by review of prior tax filings and payments. These amounts were allocated to discontinued operations.

• General corporate overhead costs were not allocated to discontinued operations.

Summarized results of the discontinued operations for the three months ended March 31, 2017 and 2016 are as follows :

	Three Months Ended March 31,
	2017		2016
	($ in thousands)
Revenues (1)	$	—	$	80,481
Cost of goods sold (excluding depreciation, depletion and amortization) (1)	—		75,700
Depreciation and amortization	—		2,354
Selling, general and administrative expenses	—		1,598
Interest expense, net	—		597
Income from discontinued operations before provision for income taxes	—		232
Provision for income taxes	—		6
Income from discontinued operations, net of taxes	—		226
(1) Fuel revenues and cost of goods sold include excise taxes and similar taxes:	$	—	$	13,083

On August 31, 2016, we completed the sale of our Fuel business pursuant to the terms of the Restated Purchase Agreement. The purchase price was $167.7 million, subject to adjustment based on actual working capital conveyed at closing. The following escrow accounts were established at closing:

• $7 million of the sales price was withheld as a general escrow associated with certain indemnification obligations. Any unutilized escrow balance, plus any accrued interest thereon, will be paid 54 months from the closing date;

• $4 million of the sales price was withheld as a hydrotreater escrow to satisfy any cost overruns of the Birmingham hydrotreater completion. Any unutilized escrow balance, along with any accrued interest thereon, will be paid 60 days after the substantial completion of the Birmingham hydrotreater;

• $2.25 million of the sales price was withheld as the Renewable Fuel Standard escrow account. The entire amount, along with interest thereon, was collected in April 2017; and

• $1 million of the sales price was withheld as a pipeline escrow account. Any unutilized escrow balance, along with any accrued interest thereon, will be released with the general escrow.

Escrow receivables are recorded at the net present values of estimated future recoveries and will be adjusted as contingencies are resolved.

9

The following table represents the gain on sale from the Fuel business recognized in the third quarter of 2016 (in thousands). These amounts may be adjusted as certain contingencies regarding estimated transaction costs and escrow receivables are resolved in subsequent periods.

Purchase price	$	167,736
Adjustments:
Working capital true-up	3,398
Other adjustments	(2,911		)
General escrow	(7,000		)
Hydrotreater escrow	(4,000		)
Other escrow	(3,250		)
Net proceeds	153,973
Less:
Net book value of assets and liabilities sold	(125,317		)
Escrow receivable	10,597
Transaction costs including commissions	(7,679		)
Other receivables	125
Gain on sale of Fuel business	$	31,699

3.OTHER FINANCIAL DATA

Assets held for sale

We consider assets to be held for sale when management commits to a formal plan to actively market the assets for sale at a price reasonable in relation to fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset is expected to be completed within one year and it is unlikely that significant changes will be made to the plan.  Upon designation as held for sale, we record the carrying value of the assets at the lower of its carrying value or its estimated fair value, less costs to sell. In accordance with generally accepted accounting principles, assets held for sale are not depreciated.

Discontinued Operations

The results of discontinued operations are presented separately, net of tax, from the results of ongoing operations for all periods presented. The expenses included in the results of discontinued operations are the direct operating expenses incurred by the discontinued segment that may be reasonably segregated from the costs of the ongoing operations of the Company. The assets and liabilities have been accounted for as assets held for sale in our Condensed Consolidated Balance Sheets for all periods presented. The operating results related to these lines of business have been included in discontinued operations in our Condensed Consolidated Statements of Operations for all periods presented. See Note 2 - Discontinued Operations for further detail.

Private Placement

On August 8, 2016, we entered into the Purchase Agreement with the Purchaser to issue and sell to the Purchaser in a private placement an aggregate principal amount of $20 million of our Series A Preferred Units and a Warrant that may be exercised to purchase common units representing limited partner interests in the Partnership.

The first half of the Preferred Units converted into 993,049 common units on November 3, 2016 and the second half converted to 985,222 common units on February 15, 2017.

We also issued to the Purchaser a warrant to purchase approximately 890,000 common units at an exercise price of $10.82 per common unit. The Warrant, which expires on August 16, 2022, was exercisable immediately upon issuance and contains a cashless exercise provision and other customary provisions and protections, including anti-dilution protections. This warrant is classified as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, and is included in Other long-term liabilities on our Condensed Consolidated Balance Sheets. This warrant has not been exercised as of March 31, 2017.

10

Public Offering

In November 2016, we completed a public offering of 3,400,000 of our common units at a price of $10.00 per unit and granted the underwriters an option to purchase up to an additional 510,000 common units, which the underwriter exercised in full. The offering closed on November 23, 2016. We received proceeds (net of underwriting discounts and offering expenses) from the offering of approximately $36.9 million The net proceeds from this offering were used to repay outstanding borrowings under our revolving credit agreement.

Allowance for Doubtful Accounts

The allowance for doubtful accounts totaled $0.9 million and $3.1 million at March 31, 2017 and December 31, 2016, respectively.

Inventories

Inventories consisted of the following:

	March 31, 2017		December 31, 2016
	($ in thousands)
Sand finished goods	$	9,656	$	9,631
Sand work in process	3,307		7,597
Sand raw materials and supplies	290		229
Total	$	13,253	$	17,457

During the first quarter of 2016, we wrote down $5.4 million of our sand inventory based on our lower or cost or market analysis. We attributed this write-down to declining market conditions and a significant decline in prices.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following:

	March 31, 2017		December 31, 2016
	($ in thousands)
Escrow receivable, current	$	5,256	$	5,253
Prepaid lease assets, current	3,464		3,408
Prepaid insurance	793		826
Other	2,646		1,887
Total	$	12,159	$	11,374

Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	March 31, 2017		December 31, 2016
	($ in thousands)
Machinery and equipment (1)	$	90,035	$	90,035
Buildings and improvements (1)	66,190		66,190
Land and improvements (1)	45,065		45,065
Mineral reserves	30,181		30,181
Construction in progress	3,529		1,878
Capitalized reclamation costs	2,445		2,445
Total cost	237,445		235,794
Accumulated depreciation and depletion	74,150		70,310
Net property, plant and equipment	$	163,295	$	165,484

(1) Includes assets under capital lease

We classified $473 thousand and $371 thousand to assets held for sale for continuing operations as of March 31, 2017 and December 31, 2016.

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We recognized $3.9 million and $5.1 million of depreciation and depletion expense for the three months ended March 31, 2017 and 2016, respectively. Depreciation and depletion expense for continuing operations totaled $4.2 million for the three months ended March 31, 2016.

Property, plant and equipment included as part of the assets held for sale were no longer depreciated from the time that they were classified as such.

Intangible Assets

Our intangible assets consisted of the following:

	Cost		Accumulated  Amortization		Net
	($ in thousands)
March 31, 2017:
Patents	$	7,443	$	3,943	$	3,500
Supply and transportation agreements	569		140		429
Non-compete agreement	100		27		73
Total	$	8,112	$	4,110	$	4,002
December 31, 2016:
Patents	$	7,443	$	3,195	$	4,248
Supply and transportation agreements	569		112		457
Non-compete agreement	100		24		76
Total	$	8,112	$	3,331	$	4,781

We recognized $0.8 million and $2.2 million of amortization expense for the three months ended March 31, 2017 and 2016, respectively.Amortization expense for continuing operations totaled $0.7 million for the three months ended March 31, 2016.

Other Assets, Net

Other assets, net consisted of the following:

	March 31, 2017		December 31, 2016
	($ in thousands)
Deferred lease asset (1)	$	8,813	$	8,826
Prepaid lease assets, net of current portion (2)	8,360		8,616
Escrow receivable, non-current (3)	5,544		5,459
Other	2,402		2,429
Total	$	25,119	$	25,330

(1) During 2016, we completed negotiations with various railcar lessors pursuant to which we terminated a future order of railcars, deferred future railcar deliveries and reduced and deferred payments on existing leases. The related rent expense is recorded on a straight-line basis over the lease term.

(2) The cost to transport leased railcars from the manufacturer to our site for initial placement in service is capitalized and amortized over the term of the lease (typically five to seven years). This balance reflects the non-current portion of these capitalized costs.

(3) Non-current receivables are recorded at net present value of estimated recoveries and will be adjusted as contingencies are resolved.

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Accrued Liabilities

Accrued liabilities consisted of the following:

	March 31, 2017		December 31, 2016
	($ in thousands)
Mining	$	3,381	$	227
Fuel sale related-liabilities	2,525		2,784
Current portion of business acquisition obligations	1,799		1,703
Logistics	1,560		1,814
Sand purchases and royalties	914		517
Deferred compensation	848		848
Maintenance	518		53
Salaries and other employee-related	513		710
Professional fees	508		452
Accrued interest	466		641
Sales, excise, property and income taxes	409		—
Current portion of contract termination	210		160
Derivative contract liability	78		227
Other	164		1,493
Total	$	13,893	$	11,629

Other Long-term Liabilities

Other long-term liabilities consisted of the following:

	March 31, 2017		December 31, 2016
	($ in thousands)
Long-term promissory note	$	8,480	$	8,480
Stock warrants	7,715		7,019
Deferred lease obligation (1)	7,579		5,858
Contract and project terminations	5,244		5,319
Asset retirement obligation due	2,667		2,647
Other	1,000		1,000
Total	$	32,685	$	30,323

(1) We recognize lease expense for operating leases on a straight-line basis over the term of the lease, beginning on the date we take possession of the property. The difference between the cash paid to the lessor and the amount recognized as lease expense on a straight-line basis is included in deferred lease obligation and classified in Other long-term liabilities on our Condensed Consolidated Balance Sheets.

Long-term Promissory Note

During the second quarter of 2016, we negotiated significant concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on rail cars and reduced cash payments on a substantial portion of the existing rail cars in our fleets. In exchange of these concessions, we issued at par an Unsecured Promissory Note in the aggregate principal amount of $8 million (the “PIK Note”) for delivery deferrals. The PIK Note bears interest at a rate of 10% per annum payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. The PIK Note will mature on June 2, 2020. We also issued warrants to purchase 370,000 common units representing limited partnership interests in the Partnership in exchange of these concessions during the second quarter of 2016. This note is included in Other long-term liabilities on our Condensed Consolidated Balance Sheets.

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Contract and Project Terminations

In 2014 and 2015, we began development of sand processing facilities in Independence, Wisconsin and other small projects in Ohio and Missouri.  Due to a number of complications, such as an increase in projected operating costs and a decline in the market price and demand for frac sand in early 2015, we determined that these projects were no longer economically viable.  In 2015, we recorded a $9.3 million charge to earnings, of which $9.2 million related to the Independence, Wisconsin facilities. This charge to earnings included items such as engineering, legal and other professional service fees, site preparation costs, and writedowns of assets to estimated net realizable value. 

Management committed to a plan to discontinue these projects in April 2015. In accordance with Financial Accounting Standards Board (“FASB”) ASC 420, Exit or Disposal Cost Obligations, any contract termination charges and estimated values of continuing contractual obligations for which we will receive no future value will be recognized as a charge to earnings as of the contract termination date or cease-use date. We estimated these contract termination charges to be approximately $1.4 million. These liabilities will be reviewed periodically and may be adjusted when necessary, but we do not expect any such adjustments to be significant.

During 2016, we negotiated concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on rail cars and reduced cash payments on a substantial portion of the existing rail cars in our fleets. In exchange for these concessions, we incurred a contract termination charge of $4 million. We issued at par an Unsecured Promissory Note in the aggregate principal amount of $4 million with interest payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. This note bears interest at a rate of five percent per annum and is due and payable within 30 days following the date on which financial statements are publicly available covering the first date on which these financial metrics have been met.

The following table illustrates the various contract termination liabilities and exit and disposal reserves included in Accrued liabilities and Other long-term liabilities in our Condensed Consolidated Balance Sheets:

	($ in thousands)
Balance at December 31, 2016	$	5,479
Contract termination charges	—
Accretion	60
Payments	(85		)
Balance at March 31, 2017	$	5,454

Mining and Wet Sand Processing Agreement

In April 2014, a five-year contract with a sand processor (“Processor”) became effective to support our Sand business in Wisconsin. Under this contract, the Processor financed and built a wet wash processing plant near our Wisconsin operations. As part of the agreement, the Processor wet washes our sand, creates stockpiles of washed sand and maintains the plant and equipment. During the term of the agreement the Processor will own the wet plant along with the equipment and other temporary structures used to support this activity. At the end of the five-year term of the agreement or following a default under the contract by the Processor, we have the right to take ownership of the wet plant and other equipment without charge. Subject to certain conditions, ownership of the plant and equipment will transfer to us at the expiration of the term. We accounted for the wet plant as a capital lease obligation. The original capitalized lease asset and corresponding capital lease obligation totaled $3.3 million. As of March 31, 2017, we do not have any liability for capital lease obligation.

Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debt instruments.  The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are representative of their fair values due to their short maturities.  The carrying amounts of our revolving credit facility approximates fair value because the underlying instrument includes provisions that adjust our interest rates based on current market rates.The fair values of our other long-term liabilities are not materially different from their carrying values.

On June 2, 2016, we issued warrants to lessors to purchase 370,000 common units representing limited partnership interests in the partnership for concessions on various long-term leases. These warrants may be exercised at any time and from time to time during next five years, at an exercise price per common unit equal to $4.77. These fair value of these warrants was calculated at $2.45 per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement.

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On August 8, 2016, we, as part of the private placement described above, also issued a warrant to the Purchaser to purchase approximately 890,000 common units at an exercise price of $10.82 per common unit. This Warrant shall be exercisable for a period of six years from the closing date and include customary provisions and protections, including anti-dilution protections. The fair value of this warrant at issuance date was calculated at $5.56 per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement. This liability is  marked to market each quarter with fair value gains and losses recognized immediately in earnings and included in Other income (expense) on our Consolidated Statements of Operations. We recorded a loss of $0.7 million during the three months ended March 31, 2017.

Retirement Plan

We sponsor a 401(k) plan for substantially all employees that provides for us to match 100% of participant contributions up to 5% of the participant’s pay.  Additionally, we can make discretionary contributions as deemed appropriate by management. 

As of July 1, 2016, all employer contributions to the 401(k) plan were suspended. Employer contributions to these plans for continuing operations totaled $90 thousand for the three months ended March 31, 2016. We classified $54 thousand as Income from discontinued operations, net of taxes, for the three months ended March 31, 2016 .

Seasonality

For our Sand business, winter weather affects the months during which we can wash and wet-process sand in Wisconsin.  Seasonality is not a significant factor in determining our ability to supply sand to our customers because we accumulate a stockpile of wet sand feedstock during non-winter months.  During the winter, we process the stockpiled sand to meet customer requirements.  However, we sell sand for use in oil and natural gas production basins where severe weather conditions may curtail drilling activities.  This is particularly true in drilling areas located in the northern U.S. and western Canada.  If severe winter weather precludes drilling activities, our frac sand sales volume may be adversely affected.  Generally, severe weather episodes affect production in the first quarter with effects possibly continuing into the second quarter. 

Concentration of Credit Risk

We provide credit, in the normal course of business, to customers located throughout the United States and Canada.  We encounter a certain amount of credit risk as a result of a concentration of receivables among a few significant customers. We perform ongoing credit evaluations of our customers and generally do not require collateral.  The trade receivables (as a percentage of total trade receivables) as of March 31, 2017 and December 31, 2016 from such significant customers are set forth below:

	March 31, 2017		December 31, 2016
Customer A	29	%	22	%
Customer B	17	%	13	%
Customer C	10	%	16	%

Significant customers

The table shows our significant customers for our continuing operations for the three months ended March 31, 2017 and 2016.

	March 31, 2017		March 31, 2016
Customer A	32	%	34	%
Customer B	17	%	*
Customer D	*		18	%

An asterisk indicates revenue is less than ten percent.

Geographical Data

Although we own no long-term assets outside the United States, our Sand business began selling product in Canada during 2013.  We recognized $4.2 million and $5.7 million of revenues in Canada for the three months ended March 31, 2017 and 2016, respectively.  All other sales have occurred in the United States.

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Recent Accounting Pronouncements

In May 2014, August 2015 and May 2016, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, ASU 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, and ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively, as a new Topic, Accounting Standards Codification Topic 606.  The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual periods beginning after December 15, 2017 with early adoption permitted on January 1, 2017 and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We have certain contractual arrangements that include "take-or-pay" provisions. The fixed fees to which we have an unconditional right under these contracts could be subject to certain recognition changes and additional disclosure under ASU 2014-09. As we are in the process of evaluating the impact of the standard, we have not yet quantified the impact of adoption or determined the method of adoption. During 2017, we will perform the remainder of our implementation process, which will include quantification of impact, selection of adoption method and development of policies. We will adopt this guidance in the first quarter of 2018.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize lease assets and lease liabilities generated by contracts longer than a year on their balance sheet. The ASU also requires companies to disclose in the footnotes to their financial statements information about the amount, timing, and uncertainty for the payments they make for the lease agreements. ASU 2016-02 is effective for public companies for annual periods and interim periods within those annual periods beginning after December 31, 2018. Early adoption is permitted for all entities. While we are not yet in a position to assess the full impact of the application of this ASU, we expect that the impact of recording the lease liabilities and the corresponding additional assets will have a significant impact on our financial position and results of operations and related disclosures in the notes to our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows.  This ASU provides classification guidance for certain cash receipts and cash payments including payment of debt extinguishment costs, settlement of zero-coupon debt instruments, insurance claim payments and distributions from equity method investees.  ASU 2016-15 is effective on January 1, 2018, with early adoption permitted. We are evaluating the effect of adopting this new accounting guidance but do not expect adoption will have a material impact on our financial position, results of operations or cash flows.

In November 2016 the FASB issued ASU 2016-18, Statement of Cash Flows.  This ASU requires entities to show changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one-line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. We currently do not have any restricted cash and do not expect adoption will have a material impact on our financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations.  This ASU provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the "set") is a business and provides a screen to determine when a set is not a business. Under this ASU, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. This guidance will be adopted and applied to business combinations in the future.

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4.LONG-TERM DEBT

Following is a summary of our long-term debt:

	March 31, 2017			December 31, 2016
	($ in thousands)
Revolving credit facility:
Principal	$	158,872		$	140,701
Deferred financing costs	(6,188		)	(6,689		)
Total long-term debt	$	152,684		$	134,012

Revolving Credit Facility

On June 27, 2014, we entered into an amended and restated revolving credit and security agreement (as amended, the “Credit Agreement”) among Emerge Energy Services LP, as parent guarantor, each of its subsidiaries, as borrowers (the “Borrowers”), and PNC Bank, National Association, as administrative agent and collateral agent (the “agent”), and the lenders thereto. The Credit Agreement matures on June 27, 2019 and, after giving effect to the amendments described below, consists of a $190 million revolving credit facility, which included a sub-limit of up to $20 million for letters of credit, and incurs interest at a rate equal to either, at our option, LIBOR plus 5.00% or the base rate plus 4.00%. We also incur a commitment fee of 0.375% on committed amounts that are neither used for borrowings nor under letters of credit. Substantially all of the assets of the Borrowers are pledged as collateral under the Credit Agreement.

On August 31, 2016, we closed the sale of the Fuel business, used the net proceeds therefrom to repay outstanding borrowings under the Credit Agreement and entered into Amendment No. 11 to the Credit Agreement with the Borrowers, the lenders and the agent. Amendment No. 11, among other things, restated the Credit Agreement and provided a full waiver for all defaults or events of default arising out of our failure to comply with the financial covenant to generate minimum amounts of adjusted EBITDA during the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016 and the covenant to maintain the minimum amount of excess availability for any date prior to September 1, 2016.

Pursuant to Amendment No. 11, the Credit Agreement now requires the Partnership to maintain the following financial covenants:

• a covenant to maintain $15 million of excess availability (as defined in the Credit Agreement);

• a covenant to limit capital expenditures (as defined in the Credit Agreement) to certain maximum amounts for each quarter through March 31, 2019;

• beginning with the quarter ending June 30, 2017, a covenant to generate consolidated EBITDA (as defined in the Credit Agreement) in certain minimum amounts;

• beginning with the quarter ending March 31, 2018, a covenant to maintain an interest coverage ratio (as defined in the Credit Agreement) of not less than 2.00 to 1.00, which is scheduled to increase to 3.00 to 1.00 for the fiscal quarter ending March 31, 2019; and

• a covenant to raise at least $31.2 million of net proceeds from the issuance and sale of common equity by November 30, 2016, which was satisfied by our underwritten sale of common units which closed on November 23, 2016.

In addition, the Credit Agreement also prohibits us from making cash distributions to our unitholders and requires all cash receipts by us and our subsidiaries to be swept on a daily basis and used to reduce outstanding borrowings under the Credit Agreement.

On April 12, 2017, the Partnership entered into Amendment No. 12 to the Credit Agreement. The Amendment amended the Revolving Credit Agreement to permit the Partnership and the Borrowers to enter into the Second Lien Term Loan Agreement and to reduce the revolving credit facility to $190 million, and further reduce the revolving credit facility on a quarterly basis to $125 million for the quarter beginning January 1, 2019.

At March 31, 2017, we were in compliance with our loan covenants and had undrawn availability under the Credit Facility totaling $31.9 million, well above the $15 million minimum availability required under our current covenants, and our outstanding borrowings under the Credit Agreement bore interest at a weighted-average rate of 6.23%.

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Second Lien Term Loan Agreement

Subsequent to quarter end, on April 12, 2017, we entered into a new $40 million second lien senior secured term loan facility with our wholly owned subsidiaries Emerge Energy Services Operating LLC and Superior Silica Sands LLC, as borrowers (the “Borrowers”) and U.S. Bank National Association as disbursing agent and collateral agent (the “Second Lien Term Loan Agreement”). The Second Lien Term Loan Agreement matures on April 12, 2022. Proceeds of the new term credit facility were used to (i) pay down a portion of the our existing revolving credit facility, (ii) fund the acquisition described in Note 11, (iii) pay fees and expenses incurred in connection with the new term credit facility and (iv) for general business purposes. Substantially all of our assets are pledged as collateral on a second lien basis under the Second Lien Term Loan Agreement.

The Second Lien Term Loan Agreement contains various covenants and restrictive provisions and also requires the maintenance of certain financial covenants as follows:

• beginning with the fiscal quarter ending March 31, 2018, an interest coverage ratio of not less than 1.70:1.00 increasing quarterly thereafter to 2.55:1.00 for the fiscal quarter ending March 31, 2019 and thereafter;

• beginning with the fiscal quarter ending June 30, 2017, a minimum EBITDA of not less than $637,500 for such fiscal quarter, increasing quarterly to $50 million for the four fiscal quarter period ending June 30, 2019 and thereafter; and

• minimum excess availability of at least $12.75 million so long as the Revolving Credit Agreement remains in effect.

Loans under the Second Lien Term Loan Agreement will bear interest at the Partnership’s option at either the base rate plus 9.00%, or LIBOR plus 10.00%.

5.RELATED PARTY TRANSACTIONS

Related party transactions included in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations for continuing operations are summarized in the following table:

	Three Months Ended March 31,
	2017		2016
	($ in thousands)
Wages and employee-related costs (1)	$	4,076	$	2,566

Wages and employee-related costs for discontinued operations for March 31, 2016 was $1.9 million.

	March 31, 2017		December 31, 2016
	($ in thousands)
Accounts receivable	$	—	$	371
Accounts payable and accrued liabilities	$	441	$	436

(1) We do not have any employees.  Our general partner manages our human resource assets, including fringe benefits and other employee-related charges.  We routinely and regularly reimburse our general partner for any employee-related costs paid on our behalf, and report such costs as operating expenses.

6.EQUITY-BASED COMPENSATION

Effective May 14, 2013, we adopted our 2013 Long-Term Incentive Plan (the “LTIP”) for providing long-term incentives for employees, directors, and consultants who provide services to us, and provides for the issuance of an aggregate of up to 2,321,968 common units to be granted either as options, restricted units, phantom units, distribution equivalent rights, unit appreciation rights, unit award, profits interest units, or other unit-based award granted under the plan.  All of our outstanding grants will be settled through issuance of limited partner common units.

For remaining phantom units granted to employees in 2013, we currently assume a 55-month vesting period, which represents management’s estimate of the amount of time until all vesting conditions have been met. Concurrent with the closing of a secondary offering in June 2014 and the exercise of the underwriters’ over-allotment in July 2014, 90,686 of these phantom units vested and common units were issued. For other phantom units granted to employees, we assume a 24 to 36-month vesting period. Restricted units are awarded to our independent directors on each anniversary of our IPO, each with a vesting period of one year.  Regarding distributions for independent directors and other employees, distributions are credited to a distribution equivalent rights account for the benefit of each participant and become payable generally within 45 days following the date of vesting.  As of March 31, 2017, the unpaid liability for distribution equivalent rights totaled $0.8 million. 

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In 2017, we granted 31,750 time-based phantom units to certain officers to vest in equal installments on each anniversary date of the grant over a period of two to three years.

The following table summarizes awards granted during the three months ended March 31, 2017.

	Total Units		Phantom Units		Restricted Units	Fair Value per Unit at Award Date
Outstanding at December 31, 2016	289,607		213,851		75,756	$	13.09
Granted	31,750		31,750		—	$	12.57
Vested	(15,400	)	(15,400	)	—	$	50.04
Forfeitures	—		—		—	$	—
Outstanding at March 31, 2017	305,957		230,201		75,756	$	13.30

For each of the three months ended March 31, 2017 and 2016, we recorded non-cash equity-based compensation expense of $0.3 million in selling, general and administrative expenses.  Non-cash equity-based compensation expense for continuing operations was $0.2 million for the three months ended March 31, 2016.

As of March 31, 2017, the unrecognized compensation expense related to the grants discussed above amounted to $1.6 million to be recognized over a weighted average of 0.97 years.

7.INCOME TAXES

Continuing operations

Our provision for income taxes for continuing operations relates to: (i) Texas margin taxes for the Partnership, and (ii) an insignificant amount of Canadian income taxes on SSS earnings in Canada (most of our earnings are exempted under a U.S/Canada tax treaty).  For federal income tax purposes, we report our income, expenses, gains, and losses as a partnership not subject to income taxes.  As such, each partner is responsible for his or her share of federal and state income tax.  Net earnings for financial statement purposes may differ significantly from taxable income reportable to each partner because of differences between the tax basis and financial reporting basis of assets and liabilities.

The composition of our provision for income taxes for continuing operations is as follows:

	Three Months Ended March 31,
	2017		2016
	($ in thousands)
Texas margin tax	$	—	$	20
Total provision for income taxes	$	—	$	20

We are responsible for our portion of the Texas margin tax that is included in our subsidiaries’ consolidated Texas franchise tax returns.  For our operations in Texas, the effective margin tax rate is approximately 0.75% as defined by applicable state law.  The margin tax qualifies as an income tax under GAAP, which requires us to recognize the impact of this tax on the temporary differences between the financial statement assets and liabilities and their tax basis attributable to such tax.

Discontinued operations

Our provision for income taxes for discontinued operations relates to (i) Texas margin taxes for Direct Fuels, and (ii) federal and state income taxes for Emerge Energy Distributors Inc. (“Distributor”). Distributor reports its income, expenses, gains, and losses as a corporation and is subject to both federal and state income taxes.Federal and state income tax expense for discontinued operations for the three months ended March 31, 2016 was $6 thousand.

8.EARNINGS PER COMMON UNIT

We compute basic earnings (loss) per unit by dividing net income (loss) by the weighted-average number of common units outstanding including certain participating securities.  Participating securities include unvested equity-based payment awards that contain rights to distributions, as well as convertible preferred units and warrants that contain contractual rights to participate in any distributions that are declared.  It is our policy to exclude convertible preferred units and warrants from the calculation of basic earnings (loss) per unit in periods of net losses from continuing operations since these securities are not contractually obligated to share in losses.

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Diluted earnings per unit is computed by dividing net income by the weighted-average number of common units outstanding, including participating securities, and increased further to include the number of common units that would have been outstanding had potential dilutive units been exercised.  The dilutive effect of restricted units is reflected in diluted net income per unit by applying the treasury stock method.  Under FASB ASC 260-10-45, Contingently Issuable Shares, 93,806 of our outstanding phantom units are not included in basic or diluted earnings per common unit calculations as of March 31, 2017.  We exclude all potentially dilutive units from the diluted earnings per unit calculation for any periods of net loss from continuing operations as their effect would be anti-dilutive.

Basic and diluted earnings (loss) per unit are computed as follows:

	Three Months Ended March 31,
	2017			2016
	($ in thousands, except per unit data)
Net income (loss) from continuing operations	$	(11,390	)	$	(34,441	)
Net income (loss) from discontinued operations	—			226
Net Income (loss)	$	(11,390	)	$	(34,215	)
Weighted average number of common units outstanding - basic and diluted	30,061,022			24,121,222
Basic and diluted earnings (loss) per unit:
Earnings (loss) per common unit from continuing operations	$	(0.38	)	$	(1.42	)
Earnings (loss) per common unit from discontinued operations	—			0.01
Basic and diluted earnings (loss) per common unit	$	(0.38	)	$	(1.41	)

9.RECURRING FAIR VALUE MEASUREMENTS

We follow FASB ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and specifies disclosures about fair value measurements.  This guidance establishes a hierarchy for disclosure of the inputs to valuations used to measure fair value.  The hierarchy prioritizes the inputs into three broad levels as follows.

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

• Level 3 inputs are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.

Our valuation models consider various inputs including (a) mark to market valuations, (b) time value and, (c) credit worthiness of valuation of the underlying measurement.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

The following table shows the three interest rate swap agreements we entered into during 2013 to manage interest rate risk associated with our variable rate borrowings.

Agreement Date	Effective Date	Maturity Date	Notional Amount	Fixed Rate	Variable Rate
Nov. 1, 2013	Oct. 14, 2014	Oct. 16, 2017	$25,000,000	1.33200%	1 Month LIBOR
Nov. 7, 2013	Oct. 14, 2014	Oct. 16, 2017	$25,000,000	1.25500%	1 Month LIBOR
Nov. 21, 2013	Oct. 14, 2014	Oct. 16, 2017	$20,000,000	1.21875%	1 Month LIBOR

The Fuel business utilized financial hedging arrangements whereby we hedged a portion of our gasoline and diesel inventory, which reduced our commodity price exposure on some of our activities.  The derivative commodity instruments we utilized consisted mainly of futures traded on the New York Mercantile Exchange.  Following the sale of the Fuel business, we have no open commodity derivative contracts.

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We do not designate our derivative instruments as hedges under GAAP.  As a result, we recognize derivatives at fair value on the consolidated balance sheet with resulting gains and losses reflected in interest expense (for interest rate swap agreements). The resulting gains and losses for the Fuel business were recorded to cost of goods sold for discontinued operations (for derivative commodity instruments), as reported in the condensed consolidated statements of operations.  Our derivative instruments serve the same risk management purpose whether designated as a hedge or not.  We derive fair values principally from published market interest rates and fuel price quotes (Level 2 inputs).  The precise level of open position commodity derivatives is dependent on inventory levels, expected inventory purchase patterns, and market price trends.  We do not use derivative financial instruments for trading or speculative purposes.

On August 8, 2016, we, as part of the private placement described above, also issued a warrant to the Purchaser to purchase approximately 890,000 common units at an exercise price of $10.82 per common unit. The Warrant shall be exercisable for a period of six years from the closing date and include customary provisions and protections, including anti-dilution protections. The fair value of this warrant at issuance date was calculated at $5.56 per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement.  This liability is  marked to market each quarter with fair value gains and losses recognized immediately in earnings and included in Other expense (income) on our Consolidated Statements of Operations. We recorded a non-cash mark-to-market adjustment of $0.7 million during the three months ended March 31, 2017.

The fair values of outstanding derivative instruments and warrant and their classifications within our Condensed Consolidated Balance Sheets are summarized as follows:

	March 31, 2017		December 31, 2016		Classification
	($ in thousands)
Interest rate swaps	$	78	$	227	Accrued liabilities
Warrant liability	$	7,715	$	7,019	Other long-term liabilities

The effect of derivative instruments, none of which has been designated for hedge accounting, on our Condensed Consolidated Statements of Operations was as follows:

	Three Months Ended March 31,
	2017			2016		Classification
	((income) expense $ in thousands)
Interest rate swaps	$	(56	)	$	411	Interest expense, net
Commodity derivative contracts	—			19		Income from discontinued operations
Warrant	696			—		Other expense (income)
	$	640		$	430

10.SUPPLEMENTAL CASH FLOW DISCLOSURES

The following supplemental disclosures may assist in the understanding of our Condensed Consolidated Statements of Cash Flows:

	Three Months Ended March 31,
	2017		2016
	($ in thousands)
Cash paid for interest	$	2,921	$	6,326
Cash paid for income taxes, net of refunds	$	15	$	(67	)
Purchases of PP&E accrued but not paid at period-end	$	1,561	$	2,986
Purchases of PP&E accrued in a prior period and paid in the current period	$	170	$	864

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11.SUBSEQUENT ACQUISITION

On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Materials Holding Company, Inc., Osburn Materials, Inc., Osburn Sand Co. and South Lehr, Inc. (collectively Osburn Materials) for $20 million. The transaction was funded with a new $40 million term loan, and the remaining proceeds after transaction fees and expenses were applied towards a pay down on the outstanding balance of the revolving credit facility. Osburn Materials is located approximately 25 miles south of San Antonio, Texas and currently produces and sells sand and construction materials but does not serve the energy markets. We will upgrade the existing operations for a conversion into frac sand sales. Osburn Materials’ current sand production, which consists mostly of 40/70 and 100 mesh, meets American Petroleum Institute (API) specifications for all grades.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Emerge Energy Services LP (“Emerge”) is a Delaware limited partnership that completed its initial public offering (“IPO”) on May 14, 2013 to become a publicly traded partnership.  The combined entities of Superior Silica Sands LLC (“SSS”), a Texas limited liability company and Emerge Energy Services Operating LLC (“Emerge Operating”), a Delaware limited liability company, represent Emerge. 

References to the “Partnership,” “we,” “our” or “us” refer collectively to Emerge and all of its subsidiaries.

Overview

We are a publicly-traded limited partnership formed in 2012 by management and affiliates of Insight Equity Management Company LLC and its affiliates (collectively “Insight Equity”) to own, operate, acquire and develop a diversified portfolio of energy service assets.

On August 31, 2016, we completed the sale of our Fuel business pursuant to an Amended and Restated Purchase and Sale Agreement, dated August 31, 2016 (the “Restated Purchase Agreement”), with Susser Petroleum Operating Company LLC and Sunoco LP (together, “Sunoco”). Sunoco paid Emerge a purchase price of $167.7 million in cash (subject to certain working capital and other adjustments in accordance with the terms of the Restated Purchase Agreement), of which $14.25 million was placed into several escrow accounts to satisfy potential claims from Sunoco for indemnification under the Restated Purchase Agreement. Any escrowed funds remaining after certain periods of time set forth in the Restated Purchase Agreement will be released to Emerge, provided that no unsatisfied indemnity claims exist at such time.

The results of operations of the Fuel business have been classified as discontinued operations for all periods presented and we now operate our continuing business in a single Sand business. Through our Sand business, we are engaged in the businesses of mining, processing, and distributing silica sand, a key input for the hydraulic fracturing of oil and gas wells. We conduct our Sand operations through our subsidiary SSS, and we believe our SSS brand has name recognition and enjoys a positive reputation with our customers.

On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Osburn Materials for $20 million. The transaction was funded with a new $40 million term loan, and the remaining proceeds after transaction fees and expenses were applied towards a pay down on the outstanding balance of the revolving credit facility. Osburn Materials is located approximately 25 miles south of San Antonio, Texas and currently produces and sells sand and construction materials but does not serve the energy markets. We will upgrade the existing operations for a conversion into frac sand sales. Osburn Materials’ current sand production, which consists mostly of 40/70 and 100 mesh, meets API specifications for all grades.

The following discussion analyzes our financial condition and results of operations and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, as well as historical condensed consolidated financial statements and notes included elsewhere in this Quarterly Report.

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Results of Operations

The following table summarizes our consolidated operating results.

	Three Months Ended March 31,
	2017			2016
Revenues	$	75,344		$	29,670
Operating expenses:
Cost of goods sold (excluding depreciation, depletion and amortization)	72,311			43,790
Depreciation, depletion and amortization	4,656			4,907
Selling, general and administrative expenses	5,878			6,775
Contract and project terminations	—			4,026
Total operating expenses	82,845			59,498
Operating income (loss)	(7,501		)	(29,828		)
Other expense (income):
Interest expense	3,198			4,594
Other	691			(1		)
Total other expense	3,889			4,593
Income (loss) before provision for income taxes	(11,390		)	(34,421		)
Provision (benefit) for income taxes	—			20
Net income (loss) from continuing operations	(11,390		)	(34,441		)
Income (loss) from discontinued operations, net of taxes	—			226
Net income (loss)	$	(11,390	)	$	(34,215	)
Adjusted EBITDA (a)	$	68		$	(9,513	)

(a)See “Adjusted EBITDA” below for a discussion of Adjusted EBITDA and a reconciliation to net income (loss) and cash flows from operations.

Major Factors Impacting Comparability Between Prior and Future Periods

Market Trends

Beginning in late 2014, the market prices for crude oil and refined products began a steep and protracted decline which continued into 2016. This greatly impacted the demand for frac sand as drilling and completion of new oil and natural gas wells was significantly curtailed in North America. As a result, we experienced significant downward pressure on sand volume and pricing. However, commodity prices stabilized in the middle of 2016, leading to an improvement in drilling activity during the third quarter of 2016 and into 2017. We expect market conditions to continue to improve in 2017. The improving demand environment for frac sand has significantly tightened the availability of supply, and as a result, customers are seeking surety of supply through contractual commitments. We are now selectively agreeing to multi-year contracts with some of our key accounts. We believe this ensures the customers a steady supply of product in exchange for covering the infrastructure-related fixed costs plus needed margins associated with operating our business.

Sale of Fuel Business

In order to improve our competitive positioning and retain upside for the eventual recovery in the oil and gas cycle, we divested our Fuel business to reduce our debt burden. We recorded a gain of $31.7 million on the sale of the Fuel business. Please see Note 2 to our financial statements for a detailed discussion of the sale of the Fuel business.

Expansion of Sand Resources

On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Osburn Materials for approximately $20 million. Osburn Materials is located approximately 25 miles south of San Antonio, Texas and currently produces and sells sports sands and building products but does not yet serve the energy markets. Osburn Materials has API-specification, strategic reserves that will bolster our presence in local sands and balance our portfolio of northern white to local sands.

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Fluctuating Fixed Costs for Sand

During 2014, our rapidly expanding frac sand business required us to contract for numerous railcars to be delivered and leased in the future as well as contracting for new transload facilities discussed above.  The industry downturn from 2015 through 2016 and the corresponding decline in volumes shipped created an excess number of railcars in our fleet, increasing our fixed costs per ton. However, we successfully negotiated concessions with several of our vendors in 2016, and the recent upturn in frac sand demand has required us to place most of our idled railcars back into service, thereby reducing our fixed cost per ton.

Changing Preferences of Customer Demand

For several years leading up to 2015, most oil and gas producers preferred the highest quality, coarsest grades of frac sand (20/40 and 30/50) to complete shale wells around North America. The drop in oil and gas prices during 2015 and 2016 forced many oil and gas producers to consider alternatives for lowering the cost to complete a new well. Lower quality proppants compared to Northern White Sands are often located closer to the shale basins than Northern White Sands, so some operators have elected to use these proppants and save on transportation costs. Finer mesh sands (40/70 and 100 mesh) have also been used more regularly as oil and gas well completion designs have evolved. However, demand for coarse grades and northern white sands started to recover in late 2016 with higher oil prices and shifting preferences. As a leading provider of frac sand, we are able to meet the changing needs of our customers and the market. Our diversified set of capabilities enables us to produce both coarse and fine grades in large quantities. Our Kosse, TX operation offers lower quality sand compared to our deposits in Wisconsin, but the site’s location near the prolific Texas oil and gas basins reduces transportation costs for our customers.

Cost Containment

To conserve liquidity and respond to the industry downturn, we became focused on prudently reducing costs while maintaining our ability to quickly respond to market demands. We have already implemented plans, but will continue to aggressively contain costs in the future. Such measures include:

• We are minimizing the overall cost of sand sold by finding the lowest cost combinations of sand source, production location and transportation providers wherever possible.

• We began using new mining techniques at two of our Wisconsin mines in the third quarter of 2015, and introduced these techniques to our Kosse mine in July 2016.

• We have negotiated, and continue to negotiate, price concessions and purchase commitment concessions from our major vendors, such as railcar lessors, rail transportation providers, mine operators, transload facilities operators, and professional services providers.

• We have minimized our capital expenditures to include only those projects with the potential for rapid returns, and comply with our bank covenants that limit capital expenditures.

Development of Sand Distribution System

In 2013 and 2014, we developed our sand distribution system through the addition of third-party transload facilities in the basins in which our customers operate.  We are able to charge higher prices for these in-basin sales than for FOB-plant sales to provide this additional service and convenience to our customers and to cover related transportation and other services costs.  Although prices for these services were lowered during the industry downturn in 2015 and 2016, we have recently reinstated ancillary charges to better recover our fixed and variable costs.

Technology Driven Proppant Products

In November 2015, we acquired 11 patents and other intellectual property assets from AquaSmart Enterprises LLC for their Self-Suspending Sand technology. The product brand is marketed as SandMaxX™. While subject to ongoing field testing that began in 2016 and data validation, this new technology offers the potential to increase productivity and completion efficiencies in oil and gas wells while improving pump time, and well site economics. At our Barron dry plant, we have a pilot production circuit to produce in excess of 175,000 tons per year of SandMaxX™ product. This pilot production circuit uses proprietary and patented technology to coat all grades of standard frac sand. SandMaxX™ product was pumped downhole in 26 different trial wells during 2016, and while the early results appear favorable, we are working closely with our customers to confirm and document actual well performance data in addition to comparing the results against wells completed with regular sand. Our plans for constructing a commercial scale coating plant depend upon the successful completion of the field trial testing and achieving market acceptance of the product. We will continue to work toward transforming our Sand business from a commodity business to a more value-driven approach by developing capabilities and products that enable us to increase our presence in larger, more profitable markets.

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Contract and Project Terminations

During 2016, we negotiated concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on rail cars and reduced cash payments on a substantial portion of the existing rail cars in our fleets. In exchange for these concessions, we incurred a contract termination charge of $4 million. We issued at par an Unsecured Promissory Note in the aggregate principal amount of $4 million with interest payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. This note bears interest at a rate of five percent per annum and is due and payable within 30 days following the date on which financial statements are publicly available covering the first date on which these financial metrics have been met.

Continuing Operations

	Three Months Ended March 31,
	2017			2016
	($ in thousands)
Revenues	$	75,344		$	29,670
Operating expenses:
Cost of goods sold (excluding depreciation, depletion and amortization)	72,311			43,790
Depreciation, depletion and amortization	4,656			4,907
Selling, general and administrative expenses	5,878			6,775
Contract and project terminations	—			4,026
Operating income (loss)	$	(7,501	)	$	(29,828	)
Net income (loss) from continuing operations	$	(11,390	)	$	(34,441	)
Adjusted EBITDA (a)	$	68		$	(12,982	)
Volume of sand sold (tons in thousands)	1,251			439
Volume of sand produced by dry plant (tons in thousands):
Arland, Wisconsin facility	368			—
Barron, Wisconsin facility	532			320
New Auburn, Wisconsin facility	317			169
Kosse, Texas facility	65			17
Total volume of sand produced	1,282			506

(a)See “Adjusted EBITDA” below for a discussion of Adjusted EBITDA and a reconciliation to net income (loss) and operating cash flows.

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Revenues

Sand revenues increased by $45.7 million, primarily due to a 185% increase in total volumes sold as a result of the increased market demand for frac sand.  Revenue per ton was $60.2 and $67.6 for the quarters ended March 31, 2017 and 2016, respectively. However, average sales price per ton increased $8.6 from $51.6 in the fourth quarter of 2016 to $60.2 in the first quarter of 2017. Average sales price improved in 2017 due to increasing demands in light of current market conditions for frac sand offset by the mix in pricing of FOB plant and transload volumes. Transload sales as a percentage of total volumes sold decreased from 61% in the first quarter of 2016 to 47% in in the first quarter of 2017. We typically charge higher prices for sales from transload sites in order to cover the additional transportation costs.

Cost of goods sold (excluding depreciation, depletion and amortization)

Our cost of goods sold consists primarily of direct costs such as processing plant wages, royalties, mining, purchased sand, and transportation to the plant or to transload facilities, as well as indirect costs such as plant repairs and maintenance. Our direct costs of producing sand and our logistics costs for finished product increased with our increased sales.  The most significant components of the $28.5 million increase are:

• $10.6 million increase in the total cost to acquire and produce wet and dry sand, due mainly to higher sales volumes, and higher production costs on a per ton bases due to costs incurred to start the wet plants back up from the winter months;

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• $16.5 million increase in rail transportation-related expense, primarily due to:

• $19.1 million increased rail shipping costs due to increased volumes sold in-basin; offset by

• $1.8 million decreased rail lease expense; and

• $0.7 million decreased railcar storage costs.

Selling, general and administrative expenses

The $0.9 million decrease in selling, general and administrative expenses is attributable primarily to decrease in bad debt expense offset by higher professional fees in 2017.

Interest expense

Net interest expense decreased $1.4 million mainly due to lower average balances on outstanding debt, offset by higher average interest rates in 2017.

Other

Other expenses increased $0.7 million due to a mark-to-market loss recognized in 2017 for a change in the fair value of the warrant issued in August 2016.

Discontinued Operations

	Three Months Ended March 31,
	2017		2016
	($ in thousands)
Revenues	$	—	$	80,481
Cost of goods sold (excluding depreciation, depletion and amortization)	—		75,700
Depreciation and amortization	—		2,354
Selling, general and administrative expenses	—		1,598
Interest expense, net	—		597
Income from discontinued operations before provision for income taxes	—		232
Provision for income taxes	—		6
Income from discontinued operations, net of taxes	—		226
Gain on sale of discontinued operations	—		—
Total income (loss) from discontinued operations, net of taxes	$	—	$	226
Adjusted EBITDA (a)	$	—	$	3,469

(a)See “Adjusted EBITDA” below for a discussion of Adjusted EBITDA and a reconciliation to net income (loss).

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

We completed the sale of our Fuel business on August 31, 2016, thus we did not have any operations for the Fuel business in 2017.

Liquidity and Capital Resources

Sources of Liquidity

Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, to service our debt and to pay distributions to partners.  Our sources of liquidity generally include cash generated by our operations, borrowings under our revolving credit and security agreement and issuances of equity and debt securities.  We depend on the Credit Facility for both short-term and long-term capital needs and may use borrowings under our Credit Facility to fund our operations and capital expenditures to the extent cash generated by our operations is insufficient in any period. Following the sale of our Fuel business, the use of proceeds therefrom to repay outstanding borrowings under the Credit Agreement and our entry into Amendment No. 11 to the Credit Agreement (described below), we believe that cash generated from our liquidity sources will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

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Revolving Credit Facility

On June 27, 2014, we entered into an amended and restated revolving credit and security agreement (as amended, the “Credit Agreement”) among Emerge Energy Services LP, as parent guarantor, each of its subsidiaries, as borrowers (the “Borrowers”), and PNC Bank, National Association, as administrative agent and collateral agent (the “agent”), and the lenders thereto. The Credit Agreement matures on June 27, 2019 and, after giving effect to the amendments described below, consists of a $190 million revolving credit facility, which included a sub-limit of up to $20 million for letters of credit, and incurs interest at a rate equal to either, at our option, LIBOR plus 5.00% or the base rate plus 4.00%. We also incur a commitment fee of 0.375% on committed amounts that are neither used for borrowings nor under letters of credit. Substantially all of the assets of the Borrowers are pledged as collateral under the Credit Agreement.

On August 31, 2016, we closed the sale of the Fuel business, used the net proceeds therefrom to repay outstanding borrowings under the Credit Agreement and entered into Amendment No. 11 to the Credit Agreement with the Borrowers, the lenders and the agent. Amendment No. 11, among other things, restated the Credit Agreement and provided a full waiver for all defaults or events of default arising out of our failure to comply with the financial covenant to generate minimum amounts of adjusted EBITDA during the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016 and the covenant to maintain the minimum amount of excess availability for any date prior to September 1, 2016.

Pursuant to Amendment No. 11, the Credit Agreement now requires the Partnership to maintain the following financial covenants:

• a covenant to maintain $15 million of excess availability (as defined in the Credit Agreement);

• a covenant to limit capital expenditures (as defined in the Credit Agreement) to certain maximum amounts for each quarter through March 31, 2019;

• beginning with the quarter ending June 30, 2017, a covenant to generate consolidated EBITDA (as defined in the Credit Agreement) in certain minimum amounts;

• beginning with the quarter ending March 31, 2018, a covenant to maintain an interest coverage ratio (as defined in the Credit Agreement) of not less than 2.00 to 1.00, which is scheduled to increase to 3.00 to 1.00 for the fiscal quarter ending March 31, 2019; and

• a covenant to raise at least $31.2 million of net proceeds from the issuance and sale of common equity by November 30, 2016, which was satisfied by our underwritten sale of common units which closed on November 23, 2016.

In addition, the Credit Agreement also prohibits us from making cash distributions to our unitholders and requires all cash receipts by us and our subsidiaries to be swept on a daily basis and used to reduce outstanding borrowings under the Credit Agreement.

On April 12, 2017, the Partnership entered into Amendment No. 12 to the Credit Agreement. The Amendment amended the Revolving Credit Agreement to permit the Partnership and the Borrowers to enter into the Second Lien Term Loan Agreement and to reduce the revolving credit facility to $190 million, and further reduce the revolving credit facility on a quarterly basis to $125 million for the quarter beginning January 1, 2019.

We believe that we will be able to maintain compliance with the covenants and restrictions under the Credit Agreement, as amended, for at least the next 12 months.

At March 31, 2017, we were in compliance with our loan covenants and had undrawn availability under the Credit Facility totaling $31.9 million, well above the $15 million minimum availability required under our current covenants, and our outstanding borrowings under the Credit Agreement bore interest at a weighted-average rate of 6.23%.

Second Lien Term Loan Agreement

Subsequent to quarter end, on April 12, 2017, we entered into a new $40 million second lien senior secured term loan facility with our wholly owned subsidiaries Emerge Energy Services Operating LLC and Superior Silica Sands LLC, as borrowers (the “Borrowers”) and U.S. Bank National Association as disbursing agent and collateral agent (the “Second Lien Term Loan Agreement”). The Second Lien Term Loan Agreement matures on April 12, 2022. Proceeds of the new term credit facility were used to (i) pay down a portion of the our existing revolving credit facility, (ii) fund the acquisition described in Note 11, (iii) pay fees and expenses incurred in connection with the new term credit facility and (iv) for general business purposes. Substantially all of our assets are pledged as collateral on a second lien basis under the Second Lien Term Loan Agreement.

The Second Lien Term Loan Agreement contains various covenants and restrictive provisions and also requires the maintenance of certain financial covenants as follows:

• beginning with the fiscal quarter ending March 31, 2018, an interest coverage ratio of not less than 1.70:1.00 increasing quarterly thereafter to 2.55:1.00 for the fiscal quarter ending March 31, 2019 and thereafter;

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• beginning with the fiscal quarter ending June 30, 2017, a minimum EBITDA of not less than $637,500 for such fiscal quarter, increasing quarterly to $50 million for the four fiscal quarter period ending June 30, 2019 and thereafter; and

• minimum excess availability of at least $12.75 million so long as the Revolving Credit Agreement remains in effect.

Loans under the Second Lien Term Loan Agreement will bear interest at the Partnership’s option at either the base rate plus 9.00%, or LIBOR plus 10.00%.

Liquidity Trends

Beginning in the second half of 2014 and continuing through the middle of 2016, prices for natural gas, crude oil and refined fuels were extremely volatile and decreased significantly. Although the demand for energy services improved in the second half of 2016, our cash flows from operating activities are subject to significant quarterly variations as volatile commodity prices influence demand for our frac sand. In addition, after closing the sale of our Fuel business we are more dependent on the volatility in demand for frac sand without the benefit of cash flows generated by our Fuel business in periods of stable commodity prices. Therefore, the cash generated by our operations are driven by a number of factors beyond our control, including global and regional product supply and demand, weather, product distribution, refining and processing capacity and other supply chain dynamics, among other factors. In this current environment, we anticipate that our liquidity needs will not be met solely by cash generated from operations, and we expect to continue relying on borrowings under the Credit Agreement as source of future liquidity.

However, our ability to comply with the restrictions and covenants of the Credit Agreement is uncertain and will be affected by the amount of cash flow from our operations and events or circumstances beyond our control, including events and circumstances that may stem from the condition of financial markets and commodity price levels. If in the future we are unable to comply with the financial covenants of the Credit Agreement and the lenders are unwilling to provide us with additional flexibility or a waiver, we may be forced to repay or refinance amounts then outstanding under the Credit Agreement and seek alternative sources of capital to fund our business and anticipated capital expenditures. Any such alternative sources of capital, such as equity transactions or debt financing, may be on terms less favorable or at higher costs than our current financing sources, depending on future market conditions and other factors, or may not be available at all.

Cash Flow Summary

The table below summarizes our cash flows.

	Three Months Ended March 31,
	2017			2016
	($ in thousands)
Cash flows from operating activities	$	(12,939	)	$	(2,291	)
Cash flows from investing activities	$	(1,392	)	$	(4,913	)
Cash flows from financing activities	$	16,426		$	(2,305	)
Cash and cash equivalents at beginning of period	$	4		$	20,870
Cash and cash equivalents at end of period	$	2,099		$	11,361

Operating cash flows

Cash flows from operating activities have generally trended the same as our net income (loss) adjusted for non-cash items of depreciation, depletion and amortization, equity-based compensation, amortization of deferred financing costs, contract termination costs, unrealized losses on derivative instruments, and unrealized loss on fair value of warrants. The changes in our operating assets and liabilities were also significantly impacted by higher accounts receivable balances resulting from higher sales of sand during the first three months of 2017.

Investing cash flows

Cash flows used in investing activities decreased during the three months ended March 31, 2017 due to a decrease in our capital expenditures. Capital expenditures in the first quarter of 2016 related to the Fuel business. Additionally, as a result of the current market conditions and covenants under our Credit Agreement, we have significantly curtailed our capital expenditures to include only those projects with the potential for rapid returns, and comply with our bank covenants that limit capital expenditures.

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Financing cash flows

Our cash balance as of March 31, 2017 is $2.1 million compared to $11.4 million as of March 31, 2016. We are currently subject to a cash dominion requirement as per Amendment No. 11 to our Credit Agreement, which requires all cash receipts by us and our subsidiaries to be swept on a daily basis and used to reduce outstanding borrowings under the Credit Agreement. We manage our cash on a daily basis and make advances against the revolver based on our daily disbursements.

The main categories of our financing cash flows can be summarized as follows:

	Three Months Ended March 31,
	2017			2016
	($ in thousands)
Net debt proceeds (payments)	$	18,171		$	(802	)
Other	(1,745		)	(1,503		)
Total	$	16,426		$	(2,305	)

ADJUSTED EBITDA

We calculate Adjusted EBITDA, a non-GAAP measure, in accordance with our current Credit Agreement as: net income (loss) plus consolidated interest expense (net of interest income), income tax expense, depreciation, depletion and amortization expense, non-cash charges and losses that are unusual or non-recurring less income tax benefits and gains that are unusual or non-recurring and other adjustments allowable under our existing credit agreement.   Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess: 

• our debt covenant compliance. Adjusted EBITDA is a key component of critical covenants to our Credit Agreement;

• the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;

• the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;

• our liquidity position and the ability of our assets to generate cash sufficient to make debt payments and to make distributions; and

• our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.

We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone.  We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business. 

Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP.  Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies.

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Reconciliation of Net Income (Loss) and Operating Cash Flows to Adjusted EBITDA

The following tables present a reconciliation of net income (loss) to Adjusted EBITDA for the three months ended March 31, 2017 and 2016:

	Continuing						Discontinued				Consolidated
	Three Months Ended March 31,
	2017			2016			2017		2016		2017			2016
	($ in thousands)
Net income (loss)	$	(11,390	)	$	(34,441	)	$	—	$	226	$	(11,390	)	$	(34,215	)
Interest expense, net	3,198			4,594			—		597		3,198			5,191
Depreciation, depletion and amortization	4,656			4,907			—		2,354		4,656			7,261
Provision for income taxes	—			20			—		6		—			26
EBITDA	(3,536		)	(24,920		)	—		3,183		(3,536		)	(21,737		)
Equity-based compensation expense	347			237			—		103		347			340
Write down of sand inventory	—			5,394			—		—		—			5,394
Contract and project terminations	—			4,026			—		—		—			4,026
Provision for doubtful accounts	—			1,672			—		36		—			1,708
Accretion expense	29			29			—		—		29			29
Retirement of assets	(6		)	—			—		—		(6		)	—
Reduction in force	—			76			—		—		—			76
Other state and local taxes	424			469			—		147		424			616
Permitted acquisition transaction expenses	213			—			—		—		213			—
Non-cash deferred lease expense	1,901			—			—		—		1,901			—
Unrealized loss on fair value of warrant	696			—			—		—		696			—
Other adjustments allowable under our existing credit agreement	—			35			—		—		—			35
Adjusted EBITDA	$	68		$	(12,982	)	$	—	$	3,469	$	68		$	(9,513	)

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The following table reconciles Consolidated Adjusted EBITDA to our operating cash flows for the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017			2016
	($ in thousands)
Adjusted EBITDA	$	68		$	(9,513	)
Non-cash interest expense, net	(2,684		)	(4,642		)
Non-cash income tax expense	(424		)	(642		)
Contract and project terminations - non-cash	—			(25		)
Reduction in force	—			(76		)
Write-down of sand inventory	—			(5,394		)
Other adjustments allowable under our existing credit agreement	—			(35		)
Permitted acquisition transaction expenses	(213		)	—
Non-cash deferred lease expense	(1,901		)	—
Change in other operating assets and liabilities	(7,785		)	18,036
Cash flows from operating activities:	$	(12,939	)	$	(2,291	)
Cash flows from investing activities:	$	(1,392	)	$	(4,913	)
Cash flows from financing activities:	$	16,426		$	(2,305	)

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information about market risks for the three months ended March 31, 2017, does not differ materially from that discussed under Item 7A of our Annual Report on Form 10-K for 2016.Following the sale of the Fuel business, risks with respect to prices of refined fuels products and transmix, wholesale fuel and other feedstocks are no longer applicable to or continuing operations.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2017. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter ended March 31, 2017 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART IIOTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Although we are, from time to time, involved in litigation and claims arising out of our operations in the normal course of business, we do not believe that we are a party to any litigation that could have a material adverse impact on our financial condition or results of operations.  We are not aware of any undisclosed significant legal or governmental proceedings against us, or contemplated to be brought against us.  We maintain such insurance policies with insurers in amounts and with coverage and deductibles as our general partner believes are reasonable and prudent.  However, we cannot assure you that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at acceptable prices.

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Environmental Matters

On November 21, 2013, the EPA issued a General Notice Letter and Information Request (“Notice”) under Section 104(e) of CERCLA to one of our subsidiaries operating within the Fuel business.  The Notice provides that the subsidiary may have incurred liability with respect to the Reef Environmental site in Alabama, and requested certain information in accordance with Section 107(a) of CERCLA.  We timely responded to the Notice.  At this time, no specific claim for cost recovery has been made by the EPA (or any other potentially responsible party) against us.  There is uncertainty relating to our share of environmental remediation liability, if any, because our allocable share of wastewater is unknown and the total remediation cost is also unknown.  Consequently, management is unable to estimate the possible loss or range of loss, if any.  We have not recorded a loss contingency accrual in our financial statements.  In the opinion of management, the outcome of such matters will not have a material adverse effect on our financial position, liquidity or results of operations.

In January 2016, AEC experienced a leak in its proprietary fuel pipeline that connects the bulk storage terminal to the transmix facility located in Birmingham, Alabama. AEC management notified the controlling governmental agencies of this condition, and commenced efforts to locate the leak, determine the cause of the leak, repair the leak, and remediate known contamination to the proximate soils and sub-grade. These efforts remain in progress, and management does not expect the costs to repair and remediate these conditions to have a material impact on our financial position, results of operations, or cash flows.

Under the Restated Purchase Agreement, we agreed to indemnify Sunoco against these and any other environmental liabilities associated with the business and operations of the Fuel business prior to its sale, subject to certain exceptions. We have obtained an environmental insurance policy which, pursuant to the terms of the Restated Purchase Agreement, acts as the first recourse coverage for any pre-closing environmental liability asserted by Sunoco with our indemnification obligation being for any claims in excess of the insurance policy coverage or in the event a claim is denied under the insurance policy. Our management does not expect our environmental indemnification obligations pursuant to the Restated Purchase Agreement will have a material adverse effect on our future results of operations, financial position or cash flow.

ITEM 1A.RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition or future results.  The risks described in this report and in our Annual Report on Form 10-K are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

ITEM 4.MINE SAFETY DISCLOSURES

We adhere to a strict occupational health program aimed at controlling exposure to silica dust, which includes dust sampling, a respiratory protection program, medical surveillance, training, and other components. We designed our safety program to ensure compliance with the standards of our Occupational Health and Safety Manual and U.S. Federal Mine Safety and Health Administration (“MSHA”) regulations. For both health and safety issues, extensive training is provided to employees. We have organized safety committees at our plants made up of both salaried and hourly employees. We perform internal health and safety audits and conduct tests of our abilities to respond to various situations. Our health and safety department administers the health and safety programs with the assistance of corporate personnel and plant environmental, health and safety coordinators.

All of our production facilities are classified as mines and are subject to regulation by MSHA under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Following passage of The Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining operations. The dollar penalties assessed for citations issued has also increased in recent years. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q. 

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ITEM 6.EXHIBITS

Exhibit Number	Description
3.1	Certificate of Limited Partnership of Emerge Energy Services LP (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.2	Amendment to Certificate of Limited Partnership of Emerge Energy Services LP (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.3	First Amended and Restated Limited Partnership Agreement of Emerge Energy Services LP, dated as of May 14, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2013).
3.4	Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Emerge Energy Services LP, dated as of August 15, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 16, 2016).
3.5	Certificate of Limited Formation of Emerge Energy Services GP LLC (incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.6	Amendment to Certificate of Formation of Emerge Energy Services GP LLC (incorporated by reference to Exhibit 3.6 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.7	Amended and Restated Limited Liability Company Agreement of Emerge Energy Services GP, LLC, dated as of May 14, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2013).
31.1*	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
95.1*	Mine Safety Disclosure Exhibit.
101*	Interactive Data Files - XBRL.

*    Filed herewith (or furnished in the case of Exhibits 32.1 and 32.2).

#    Pursuant to Item 601(b)(2) of Regulation S-K, the Partnership agrees to furnish a copy of any omitted exhibit or schedule to the U.S. Securities and Exchange Commission upon request.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 4, 2017  

EMERGE ENERGY SERVICES LP
By:	EMERGE ENERGY SERVICES GP LLC, its general partner
By:	/s/ Rick Shearer
	Rick Shearer
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Deborah Deibert
	Deborah Deibert
	Chief Financial Officer
	(Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Certificate of Limited Partnership of Emerge Energy Services LP (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.2	Amendment to Certificate of Limited Partnership of Emerge Energy Services LP (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.3	First Amended and Restated Limited Partnership Agreement of Emerge Energy Services LP, dated as of May 14, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2013).
3.4	Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Emerge Energy Services LP, dated as of August 15, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 16, 2016).
3.5	Certificate of Limited Formation of Emerge Energy Services GP LLC (incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.6	Amendment to Certificate of Formation of Emerge Energy Services GP LLC (incorporated by reference to Exhibit 3.6 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
3.7	Amended and Restated Limited Liability Company Agreement of Emerge Energy Services GP, LLC, dated as of May 14, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2013).
31.1*	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
95.1*	Mine Safety Disclosure Exhibit.
101*	Interactive Data Files - XBRL.

*    Filed herewith (or furnished in the case of Exhibits 32.1 and 32.2).

#    Pursuant to Item 601(b)(2) of Regulation S-K, the Partnership agrees to furnish a copy of any omitted exhibit or schedule to the U.S. Securities and Exchange Commission upon request.

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